the distribution of bank services: a review of research ... · importance placed on the training,...

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The Distribution of Bank Services: A Review of

Research and Key Trends

Anita Chakrabarty (University of Nottingham, Malaysia Campus)

Christine T Ennew

(University of Nottingham, UK Campus)

November 2007

Financial Services Research Forum

University of Nottingham

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Executive Summary

• The purpose of this report is to provide an overview of key trends in

the distribution of banking services worldwide and to discuss these in

relation to trends in the Malaysian market.

• Distribution is central to the effective marketing of financial services.

Although cultural differences and stage of economic development have

a major impact on distribution, there are two key trends which are

relevant to distribution across all contexts, namely the development of

bancassurance and the growth in multi-channelling.

• In most countries, there is a blurring of traditional institutional

distinctions; nevertheless, for any analysis of distribution channels it

remains helpful to distinguish between direct and indirect channels and

to distinguish between technology and non technology channels.

• Although for some time, it has been argued that branch networks are

in decline, there is growing evidence to suggest that the branch

network is reviving in a number of countries, either in the form of the

mini branch or through the sharing of branch facilities.

• Financial services providers and particularly the banks are increasingly

exploring imaginative approaches the design, layout and environment

of the branch.

• Accompanying this revival of the branch network is a growth in the

importance placed on the training, recruitment of financial services

personnel in order to support cross selling activities, particularly so

given the growth in the use of banassurance as a model for selling

investment, insurance and wealth management products.

• The most dramatic trend across markets world wide has been the

development of technology driven channels including ATMs, EFTPOS,

Phone and internet, which serve to both reduce costs and increase

customer convenience and accessibility.

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• In many markets there is growing evidence of non financial retailers

moving into the provision of financial service by exploiting established

brand names and established retail networks.

• Customers rarely rely on a single channel and financial services

providers are increasingly adopting multi-channelling strategies to

ensure that they can serve different segments effectively.

• An underlying difficulty relates to the extent to which providers can

match customer profitability to channel cost. In reality its is often the

high value customers that are using low cost channels, whilst low value

customers remain dependent on the higher cost channels such as the

branch networks.

• This creates a major challenge for the future in terms of the process of

matching customers to channels.

• The suitability of particular distribution channels will vary across

customers, product types and institution types. For more complex

financial products, reassurance factors play a large role in distribution

channels acceptance by customers. This includes mortgage and

insurance products, which often necessitate the use of intermediaries

although more standardised products are more easily distributed

through technology-enabled channels.

• The product influences the type of channel that is selected by

customers because complex products naturally require face to face

consultation whilst simple products can be distributed by technology

driven channels signalling the dynamics of product- channel

interaction.

• From the consumer perspective selection of a distribution channel is

also based on the customer–product interaction, customer–channel

interactions, customer–organisation interaction, with the added

complexity of consumer characteristics viewed from a socio-economic

and psychological perspective.

• Governmental and sector regulation of distribution often constrain the

type of distribution channel available in any particular geographic

region, and can affect the strategies used to convert consumers to a

preferred channel.

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Contents Executive Summary.......................................................................................2

1. Introduction ..............................................................................................6

2. Distribution channels for financial services ...............................................7

2.1 Traditional Direct Channels of Distribution ...........................................8

2.1.1 Branch network ................................................................................ 10 2.1.2 The Future Evolution of the Branch ..................................................... 13 2.1.3 The impact on human resources ......................................................... 16 2.1.4 Summary ........................................................................................ 17

2.2 Indirect Channels of Distribution ........................................................18

2.3 Technology Driven Distribution Channels ...........................................21

2.3.1 ATM’s.............................................................................................. 22 2.3.2 EFTPOS ........................................................................................... 24 2.3.3 Telephone based .............................................................................. 25 2.3.4 The Internet as a distribution channel ................................................. 26 2.3.5 Mobile Financial Services ................................................................... 31

2.4: Non-Financial Services Retailers........................................................33

3. Product Channel Interactions and matching customers to distribution

channels ......................................................................................................38

4.Conclusions ..............................................................................................39

References: .................................................................................................42

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Tables Table 1: Largest banks in terms of branch network............................................. 12 Table 2: Online Banking users according to Region 2000-2004 (millions)............... 27 Table 3: Global Mobile phone subscribers according to Region.2005...................... 31

Figures Figure 1: Direct Distribution Channels for Financial Services ..................................9 Figure 2: Branch trends considered “Very likely to happen” ................................. 14 Figure 3: Indirect Distribution Channels ............................................................ 18 Figure 4: Technology and the Distribution of Financial Services .......................... 272 Figure 5: Distribution of Sales across Channels .................................................. 27 Figure 6: Distribution of Services across Channels .............................................. 28 Figure 7: The Internet and cost of transactions .................................................. 30

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1. Introduction

Distribution in financial services marketing is concerned with how the service

is delivered to the consumer, making sure that it is available in a place, at a

time and in a format that is appropriate and convenient for the customer. The

nature and types of financial services provided to customers and the ways in

which they are provided vary considerably across countries as a consequence

of different institutional and regulatory structures. Notwithstanding these

country specific differences, there are many aspects of financial services

marketing worldwide which point to a series of common drivers of change

and development. Two particularly important trends in relation to distribution

are the development of bancassurance and the growth in multi-channelling.

In a growing number of countries, the expansion of the financial services

sector has been accompanied by a significant blurring of lines between

different institutional types with, for instance, retail banks offering insurance

products (bancassurance), insurance companies offering bank accounts and

supermarkets launching their own credit cards. As a consequence, individual

organisations can no longer claim a distinctive market position based on the

products they offer. Rather, they have had to rely on growing their

understanding of customers and being responsive to their needs. Of

particular significance in this context, is distribution strategy which has

increasingly been recognised as a critical tool for building competitive

advantage in the financial services marketplace.

Alongside this blurring of traditional patterns of supply and partly as a

consequence, there has been an increase in the variety of distribution

channels used by financial services providers. Traditional bricks and mortar

retail branches have been radically modernised, ATMs have become

increasingly sophisticated and other ICT based methods of distribution (eg hi-

tech telephone and internet portals) are increasingly widely used.,

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Multichannelling is increasingly seen as a means of addressing a range of

customer needs and expectations (security, privacy, convenience,

accessibility, reliability, speed) enabling a financial services provider to more

effectively and efficiently serve a diversity of target markets. As multi-

channelling has become a necessity, rather than an option, for all financial

services providers, increasingly issues are articulated by the sector relating to

the difficulties of steering consumers into the most appropriate channels and

managing relationships across multiple channels.

In light of the rising importance of distribution channels in financial services,

this report provides a comparison between the distribution of financial

services in Malaysia and key developments worldwide, particularly in the UK

and US. The first section gives an overview of the role of distribution

channels, distinguishing direct and indirect channels. An evaluation of direct

channels then draws special attention to the trends in branch networks of

financial services and the developments of branches, . This is followed by a

review of indirect channel usage. The next section covers technologically

driven channels... The penultimate section provides a review of the activities

of non-financial services providers and finally, implicit to a report on

distribution channels, is a review of customer selection of channels. .

2. Distribution channels for financial services

Before examining trends in financial services distribution channels, it is

perhaps helpful to begin with a brief overview of their role and to draw

distinctions between what are referred to as direct and indirect channels.

As Ennew and Waite (2006) have explained, distribution channels in financial

services should provide consumers with:

• Appropriate advice and guidance regarding the suitability of specific

products.

• A choice and a range of product solutions to meet different customer

needs

• The means for purchasing a product

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• The means for customers to establish a relationship with the service

provider

• A service and product showcase

• A vehicle for communication of relevant aspects of financial services

• Easy access to the administration systems and processes required for

ongoing consumption of products or service.

• The means for the service provider to manage customer relationships

over time.

• The opportunity for providers to cross-sell additional products to

existing customers.

In distinguishing between direct versus indirect channels of distribution in

financial services, it is important to note that it is, strictly speaking, channel

ownership and not strictly structure which is the significant factor1. Direct

distribution channels are channels without intermediaries - the provider owns

the channel, acquires the customer and initiates a direct sales relationship

with them. Indirect distribution channels involve intermediaries or agents

who do not own the channel, but instigate the sales relationship with the

customer. The overwhelming value of the direct channel is that it affords

financial services providers with greater and better control over the

interaction with their customers. However, this closeness is mitigated by the

potentially large set-up and channel management costs involved. The indirect

channel in contrast can offer providers a wider coverage of the market,

typically with lower costs, but with of course a lower degree of control over

customer relationships and potential purchases.

2.1 Traditional Direct Channels of Distribution

Figure 1 provides a schematic outline of the most widely used forms of direct

distribution in financial services marketing

1 Ennew and Waite (2006)

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Figure 1: Direct Distribution Channels for Financial Services

Traditionally, direct channels of distribution in the financial services sector

include: direct mail, direct response advertising, branch networks, and direct

sales forces. But, whilst increasingly both direct and indirect channels of

distribution are being used in many areas of financial services, some sectors

still display greater use of one as compared to the other. For instance, retail

banking relies almost exclusively on direct distribution, whereas in the

insurance and investment sectors there continues to be extensive use of third

parties such as commercial insurance brokers and other financial advisers2.

In the UK, the direct mail and direct response advertising are still formidable

forms of distribution despite the advent of more technological driven

channels3, While direct mail is carefully targeted to the particular interested

segment, direct response advertising is more general. Both these distribution

channels are normally complemented by follow ups by a salesperson or call

centre contact staff, or alternatively customers are asked to return by post or

2 Ennew and Waite (2006) and Gough (2005) 3 Ennew and Waite (2006)

(Adapted from Harrison 1999, pg 129)

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fax, enquiry or acceptance forms. Direct mail is increasingly more accurately

targeted towards particular segments due to the sophistication of data mining

and customer information integration software. However, the most

interesting developments in distribution are in the branch network and the

branch itself .This will be elaborated upon below.

2.1.1 Branch network

The development of various technology-enabled modes of financial service

distribution has reduced the importance of the traditional branch network as

a direct channel of distribution in many developed and developing country

markets. Whilst in the past various studies highlighted the importance of

branch location as primary in consumer choice of retail banks, recent

research suggests that this may no longer be such an important predictor of

buyer behaviour4.

A move away from branch-based distribution can be explained by the

increasingly easy access to technology-based channels of distribution through

fixed-line or mobile telephones and Internet linked computers. While this

trend is most strongly in evidence in the more mature banking markets of the

developed world, it is not without problems. A recent report in the UK

highlighted that between 1995 and 2003 a total of 4041 branches closed

down with only 1074 new ones being opened. However the closures reflected

the emergence of a 'twin-track' pattern of branch changes with poorer, urban

areas of Britain facing a net loss of almost 3,000 branches, primarily due to

the high cost of this channel relative to new technology based distribution

methods. Whilst higher than average rates of branch closure were reported

for those areas defined as 'traditional manufacturing', 'built-up areas' and

'student communities5, it is also widely recognized that it is these

socioeconomic population segments that are those least likely to have access

to telephones or computers6. Hence branch closures and the increased

reliance on technology based channels has become a cause for concern from

4 Devlin (2004) 5 Leyshon, Signoretta and French (2006), 6 Zhe-Wei & Pitt,, (2004)

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a public policy perspective because of the potential loss of access to bank

services for some segments of the population. Nevertheless, customers

continue to emphasise their preference for face-to-face contact. UK

consumers’ concern with branch closures and network shrinkage became so

vociferous by 2005 that NatWest chose the fact it was not then closing

branches as the key tagline for its television advertising campaign. However,

an interesting development in recent times is that the trend of branch

closures seems to be in reversal with the opening of new branches by the big

banks in the UK, similarly in the US and in Europe.7 According to one industry

report, the revival of the branch is phoenix like, with renewed emphasis on

customer service and quality.8 Also apparent is the opening of mini banks for

example , Shinsei bank in Japan have expanded their branch network by

establishing mini financial centres and bank spots in convenient locations

such as retails stores, petrol stations, and medical facilities with extended

opening hours.9

In Malaysia, financial services institutions have had to contend with two

diametrically opposed forces dictating their branch network’s size and

configuration. Firstly, with the implementation of the ten year Financial

Sector Masterplan’s (FSMP) first phase in 2001, the required consolidation of

the banking industry began, which culminated in various mergers and

acquisitions aimed at reducing the number of banks and hence increasing

competitiveness in the industry10. Unlike other consolidation efforts, the

mergers and acquisitions in the Malaysian banking industry did not

significantly reduce the size of branch networks. Infact, the banks continued

in most locations and only closed down branches which were underutilised.

This occurred when new suburbs opened and there was migration of people

or better locations were found within the vicinity of the old branch. The

approach towards consolidation in the Malaysian banking industry did not

7 KPMG (2006), Deloitte (2005)

8 KPMG (2006

9 Datamonitor , (2005)

10 Financial Sector Masterplan by Bank Negara Malaysia at www.bnm.gov.my

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close down branches as the policy makers kept in mind the social costs

involved in terms of dislocation of resources 11

The second phase of the FSMP in 2005 brought with it a prime objective of

increasing domestic competitiveness through further liberalisation and

deregulation. The outcome effectively was an increase of branches both by

local and foreign banks, which hitherto had been restricted in their access to

the market. For example, recent foreign banks entering the Malaysian market

include Islamic based financial service providers such as the Kuwaiti Finance

House and Al-Rajhi Bank. Despite such moves it is still, and always likely to

be, the local Malaysian banks that own the majority of branches. The banks

with networks peaking above 100 branches in July 2005 were all local, as

shown in Table 1 below.

Table 1: Largest banks in terms of branch network

Name of Bank Number of Bank Branches

Maybank 353

Public Bank 252

Bumiputera Commerce Bank (now under

CIMB group)

233

RHB Bank 200

Hong Leong Bank Berhad 181

Ambank (M) Berhad 171

Eon Bank Berhad 125

Affin Bank Berhad 104

Southern Bank Berhad (now under CIMB

group)

103

(Source: www.abm.org.my)

Current figures show that the top foreign banks in terms of branch network

are;

11 From text of speech by Bank Negara Governer Tan Sri Ali Abul Hassan Sulaiman on rationale for bank mergers. August 11, 1999

from the the Star newspaper.

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1. HSBC Bank – 39 branches (www.hsbc.com.my)

2. United Overseas Bank – 37 (www.uob.com.my)

3. Standard Chartered Bank –

31(www.standardchartered.com.my)

4. OCBC Bank – 27 branches (www.ocbc.com.my)

Additionally, these top four foreign banks have launched a shared automated

teller machine (ATM) service. This shared service is provides customers of the

four banks with access to more than 300 ATMs throughout Malaysia. This is

an important milestone in terms of distribution of foreign banks’ products and

services in country.

2.1.2 The Future Evolution of the Branch

Globally, the trend in branch networks suggests that evolution of the branch

rather than extinction is becoming more apparent12. Figure 2, based on a

survey of 41 retail banks worldwide highlights branch trends considered “very

likely to happen”. An important fact to note is that 50% of the managers

surveyed indicate that an increase in branch numbers is imminent. Other

interesting developments of the branch such as operations automation and

development of advisors proactive attitude towards clients, emphasise both

the growing importance of delivering customer service and quality within the

branch and the need to recognise the cost implications of the provision of this

form of customer service.

12 Moore, 2000.

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Figure 2: Branch trends considered “Very likely to happen”

(Source:www.wrbr.06 – Capgemini survey worldwide of 41 retail banks.

*Other: means No self service: development of new types of branches)

The evolving model of branch activity as numerous studies suggest,

emphasises the inclusion of the following elements13

• Routine transaction facilities for those who are unable to access or

understand the technology enabled distribution systems.

• A location for complex product sales that require more interaction

between the customer advice and a trained professional. Bringing the

need for a higher customer-area to staff-area ratio and more private

interview areas

• A location for promoting profitable products and services, with adoption of

retail concepts such as merchandising and fewer intrusive security

measures

• A social focus where customers are encouraged to spend more time in the

branch and browse. This includes the addition of Internet cafes and coffee

bars in branches, a more cosy and comfortable ambience, for customers

to browse and allow more opportunity for cross selling.

13 Adapted from Moore, (2000) and www.wrbr06 – Capgemini World Retail Banking report 2006, and Harrison (2000)

89 85

60

36

10

26

0

10

20

30

40

50

60

70

80

90

100

Development of

advisor's

proactive attitude

towards clients

Current operations

automation

Increase in

number of

branches

Market

specialization

Increase in

branch size

*Other

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The environment of the branch takes on a special importance as these

projections become reality and become important pillars in supporting

customer acquisition and retention 14. In the United States the Umpqua Bank,

is designed with a retail store environment in mind, with branded

merchandise as well as Internet cafés15, while the Wachovia Corp’s new

outlets resemble hotels foyers more than banking halls. In the UK, retail

designers are being hired to inject more drama in the design of bank

branches. 16Another aspect of improving the branch environment is zoning

which entails delineation of bank spaces to distinct products and services. For

example, Halifax bank zones its state agent branches into ‘Move, Improve

and Inspire ‘zones. The ‘Move’ zone is specifically for customers seeking to

move into new homes, the Improve zone is for home improvement and loan

products for this purpose, whilst the ‘Inspire’ zone offers ideas on home

improvements, interior design and gardening. Apart from layout and zoning,

innovations within the branch also include the expansion of services within

the branch making it a one stop financial services provider. An example of

this is Standard Chartered’s Financial spa, presented as a one stop financial

management centre with a range of wealth management products for

customers. 17

In Malaysia too, many bank branches have been remodelled in recent years

with altered layouts offering separate zones for distinctive transactions in

recent years. For example one section of the bank has most of the self-

service kiosks in one area, with the simple transaction section in another, a

separate zone for product information materials and booths for customer and

sales force interaction. This layout with zoning of areas is apparent in both

the major local and foreign banks. In addition, rebranding efforts and in

particular the usage of brighter, breezier colour schemes in tandem with logo

changes are also apparent in recent years.

14 Keynote,( 2003)

15 Bernstel, (2006)

16 Design Week (2007)


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2.1.3 The impact on human resources

In the continuing evolution of the branch network, the front-line staff have

probably experienced the greatest impact.. In tandem with the new layouts ,

the new branch function requires a more skilled and experienced branch sales

force for the development of a sales culture. This is a clear move away from a

purely transactional culture, entailing the attraction, maintenance and

enhancement of customer relationships18. In implementing the sales culture,

some reduction in numbers of tellers and cashiers has occurred19, whilst

other personnel have faced an increased work responsibility incorporating a

proactive advisory role and the cross selling of products. Indeed, research in

cross selling has stressed the importance of employee factors (customer

orientation, knowledge, credibility) as important influences on consumers’

intention to cross buy20. This integration of service provision and selling

within an individual role has caused a considerable degree of organisational

tension consequent on the lack of clarity about the precise rule that staff

have to perform and the sense of conflict between two activities21. Indeed,

the size and complexity of the product information that the front-line ‘non-

specialist’ is expected to master could have been partially responsible for

some of the ‘mis-selling’ instances recently reported in the UK.22 The

dependency on non-specialists for simultaneous cross-selling and service

provision has also seen the need to maximise the proper utilisation of data

mining and integrated communications between different product categories

– with the resultant danger that banks have focused on customers rather

than product.23 These developments have presented banks in many

countries, including the UK with the challenge of managing staff motivation

an attitudes as well as supporting them in the development of appropriate

product knowledge.

18 Stephenson , B and Kiely , J (1991)

19 See Keynote (2003)

20 See for example, Bejou et al (1998), Liu and Leach (2001)

21 Morgan, G and Sturdy, AJ (2000) …

22 The Guardian (2005), BBC News (2005) and Financial Times (2007) highlight some recent accounts of misselling in the UK .

23 BAI online (2006); Accenture GartnerG2 (2005)Insert any of the refs you found

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In Malaysia, there is growing recognition of the importance of staff

development to support new methods of marketing and selling. One effect of

bancassurance market’s growth has been to prompt Bank Negara (the central

bank) to introduce guidelines in July 2005, which include staff development

requirements. For example, all bank staff in Malaysia dealing with

bancassurance are now required to be registered with the Life Insurance

Association Malaysia and fulfil 30 professional development hours each year,

in addition to complying with local insurers code of ethics and conduct.

Similarly, the IBBM Competency framework includes a significant element

relating to marketing and selling.

2.1.4 Summary

This review of direct distribution channels highlights a number of key trends:

• A history of decline in the size of branch networks as technology based

distribution became more widespread and cheaper;

• Consumer preferences for face to face interaction remain generally

strong and banks have faced major challenges in migrating lower value

customers into lower cost channels;

• Signs of a possible reversal of this trend with signs of an increase in

branch networks in some areas as a mean of reaching higher net worth

customers;

• Banks are thinking more creatively about the nature of the branch

network with the emergence of a new model of mini branches and the

use of more imaginative design and layout and the greater use of the

one-stop shop concept;

• The role of staff in branches is changing, with a greater emphasis on

relationship building underpinned by heightened use of integrative

software and data mining

The combination of these elements marks the potential of the direct

distribution channel to improve customer service and overall service quality.

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2.2 Indirect Channels of Distribution

Indirect channels of distribution imply the use of intermediaries, whether

institutional (tied) or independent. For instance, in insurance, pensions and

investment products, the use of brokers and independent agents widens

market coverage without the addition of fixed costs, but administratively

more training and control mechanisms are required. In the UK, the IFA’s

(independent financial advisers) are the strongest distribution route for

pensions and other insurance based savings products, whilst research in the

United States shows that the direct sales force is more successful in turning

prospects into purchasers of insurance products24. A simple classification of

indirect distribution channels in financial services is shown in Table 2 below

Figure 3: Indirect Distribution Channels

(source: Harrison , (2000)

Independent intermediaries sell products from a number of companies, while

the tied intermediaries are restricted to selling products from one particular

company. Typically intermediaries are categorised as brokers, independent

financial advisors, solicitors, accountants and estate agents who sell another

24 Deloitte (2006)

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company’s financial products25 The list of intermediaries can also include

other institutions such as financial institutions , post offices as well as

supermarkets26

An independent intermediary requires far more training than a tied

intermediary because of the greater diversity of products handled and the

stricter requirements in terms of the provision of advice. Some of the typical

challenges associated with independent intermediaries or independent

financial advisers (IFA’s) include challenges related to the commission based

remuneration for IFA’s, , and lack of strategy in attracting new customers as

found in the UK27 while recent reports suggest that in the US the growing

industry is hampered by the lack of professionals in the area.28

In the current context of financial services, banks and building societies are

also tied intermediaries for other financial products for instance insurance

products; An example of this type arrangement is Standard Chartered Bank

Singapore mortgage protection plan underwritten by Prudential Assurance Co

Singapore Pte Ltd, 29 and the Scarborough building society home insurance,

and mortgage payment protection underwritten by Norwich Union (owned by

Aviva International). In Malaysia, the most recent example of such an

arrangement is the tie up of Aviva Asia Pte .Ltd , as well as Allianz Group for

the sales of insurance products through their banking group CIMB 30

The tie ups between banks and insurers to distribute insurance products or

banks themselves distributing their own insurance products is termed

bancassurance. Bancassurance is a form of distribution that has its origins in

France , it is basically the provision of life, pension and investment products

by banking organisations. In the UK, recent reports suggest that

bancassurance have gradually increased their market share from 12.5% in

25 Harrison (2000)

26 Harrison (2000) Ennew and Waite (2006)

27 See Life Insurance International (March 2007)

28 Powell, and Palaveev (2006)

29 see http://www.standardchartered.com.sg/cb/insurance/homeprotect.html

http://www.scarboroughbs.co.uk/insurance/life_insurance.html

30 See http://www.cimb.com

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2001 to almost 18% in 2005 31. Bancassurance in the UK is also more

popular for sales of life products compared to pension products. In contrast

with the UK, banassurance is the prevalent distribution channel for insurance

products in other European countries including Portugal, Italy , France and

Spain. In developing markets such as China and in India too, bancassurance

is becoming an important channel of distribution particularly for foreign

players and local insurers are also following suit 32

In Malaysia, while retail banking is still direct, the company owned direct

sales force has always dominated the insurance sector. But with the

introduction of bancassurance in 1993 a fundamental shift has been reported.

Bancassurance in Malaysia has become a major distribution channel clawing

customers from the traditional agency force, respectively accounting for

45.3% and 49.4% of total new business in the life sector. Significantly, the

introduction of financial advisers, which is very new category of insurance

intermediaries in the Malaysian market, is proving an increasingly significant

indirect channel of distribution - particularly for wealth management

products.33

The use of intermediaries whether tied or independent poses the issue of

control for most financial providers. In particular, independent intermediaries

require more skills, training and are less controlled than tied intermediaries

when they advise customers on different types of products and recommend

the best ones for purchase. Hence in comparison to banking products, the

use of intermediaries is more prevalent in the insurance, pensions and wealth

management product categories34. Institutions may also be intermediaries

.The emergence of the bancassurance model highlights this distribution

trend. In this case banks could be tied intermediaries for insurance products

from one or more providers. However, bancassurance could also mean that

banks offer their own insurance and wealth management products sold

through their own sales forces or through other tied or independent agents.

31 See MarketWatch: Financial Services, Jan2007, Vol. 6 Issue 1, p11-12, 2p;


33 www.bnm.gov.my


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Although both direct and indirect channels of distribution form the very

backbone of traditional distribution of financial services, a discussion on

distribution channels here cannot be complete without reviewing the wide

plethora of technology driven distribution methods also known as remote or

arm’s length distribution that allow customers better and faster access to

financial services at lower costs.

2.3 Technology Driven Distribution Channels

Technology driven distribution channels are fast becoming the main delivery

channel for many simple financial services. Figure 4 below illustrates some of

the major uses of technology in the distribution of financial services.

However, it is important to bring to attention that the use of technology in

financial services implies self service which requires increased work or

involvement on the part of the customer35. The increased involvement of the

customer has generated much research on consumer adoption of these

distribution channels36. Technology driven distribution channels reduce or

even eliminate face to face interaction for both simple and complex

transactions, advice and overall service delivery. The use of these

technologies entail a certain measure of risk and uncertainty, anxiety and

stress towards its effectiveness, while there could be some costs for

customers to switch to these channels. It also reduces the social element in

the service encounter. On the other hand, it offers ease of use, convenience,

and greater control for those who are comfortable with the technology,

notwithstanding the added benefit of immense cost savings to financial

service providers. The most noted technology driven channels, the ATM’s,

EFTPOS, Telephone based channels and the internet trends will be elaborated

upon in the subsequent sections.

35 Curran and Meuter (2005)

36 See Curran and Meuter (2005) ; Matthew, Bitner, Ostrom and Brown (2005); McKechnie, Winklhofer and Ennew (2006), Devlin

and Yeung (2003)

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Figure 4: Technology in the distribution of financial services

(Adapted from Harrison 1999, pg 129)

2.3.1 ATM’s

The automatic teller machine (ATM) introduced nearly 25 years ago, was a

revolutionary piece of technology allowing customers to access banking

services anytime, but at designated locations. In terms of benefits, it reduced

the requirements for a brick and mortar presence, reduced queues, reduced

staff requirements and enabled convenient access to a wide array of simple

financial services. While the earlier ATM’s offered less services and were

within a banking institution’s premises, later ATM’s were stand alone located

in heavily populated areas or those with a heavy passing traffic of people

such as supermarkets, airports and train stations and offering multiple

services apart from simple cash dispensing, and checking of accounts akin to

multi function kiosks. Example of some of the services offered by ATM’s now

is as follows:

• bill payments,

• payment of police fines,

• top up or purchase for telcos,

• electronic share application ,

• electronic payment of shares,

• online account registration,

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• money transfer,

• third-party payments,

direct debits and standing order management.37

Apart from the above, the latest development in ATMs involves the use of

biometric technology. Biometrics technology are automatic methods for

identifying a person on the basis of some biological or behavioral

characteristic of the person. These biological or behavioral characteristics

include facial recognition, voice recognition, iris recognition, retinal

recognition, fingerprint or hand recognition among others.38

The use of biometrics in ATM’s entails that instead of keying in pin numbers,

the customer only needs to place their palm or finger on a screen for them to

avail to ATM services. Biometric technology is considered more secure than

the normal pin number system as it can only read the customers own finger

print or palm to authenticate transactions. In Japan the number of people

with biometric cards-- is estimated to be more than 5 million.39. In India,

biometrics is hailed as an innovation that can help the unbanked. In fact,

Citibank is one of the major global banks to issue biometric ATM’ cards in

India40.

Without a doubt, the ATM is an important and popular distribution mechanism

to contend with globally. Western Europe’s ATM market grew by 6 per cent

in 2004 to 316,534 installations, with 27 per cent of all ATMs located at a

non-bank site41.while in developing countries like India, ATM usage raised six

fold from 1999 to 2004, with 39 percent of bank customers using teller

machines. Developments such as biometric ATM’s which is still in the

experiential stage could potentially increase ATM usage globally. In Malaysia

there are currently 5900 ATM’s in the MEPS network (the largest ATM

37 See The Banker , (June, 2006) and (2005), also http://www.dbs.com/posb/posbatm; and www.maybank2u.com

38 Microsoft ® Encarta ® 2006. © 1993-2005 Microsoft Corporation. All rights reserved.

39 See The daily Yomiuri online (March 15th 2007) at http://www.yomiuri.co.jp/dy/business/20070315TDY08008.htm

40 see http://www.epaynews.com Citibank India Uses Biometric ATMs to Capture Micro Savings December 5, 2006

41 See http://www. http://www.rbrlondon.com/reports/atms ATMs & Cash Dispensers W.Europe published August 2006.

24

network in Malaysia)42 . Although developments such as the use of biometric

technology has not been rolled out in Malaysia, as a developing nation the

MEP’s network of ATM allows quite a wide array of services for ATM card

holders. A perusal of the websites of major banks in Malaysia highlights the

similarity of services offered by Malaysian bank ATM’s in comparison with

those globally as listed earlier43.

2.3.2 EFTPOS

Technologies such as the electronic fund transfer at point of sale (EFTPOS)

responded to consumer demand for an easier and reliable method of paying

for purchases, and for the retailers a less costly method for collecting money

than cheques. The EFTPOS system is also commonly known as the debit card

enables the direct transfer of funds from a customer's account into the

retailer's account. The method first evolved in the early to mid-1980s and

has become a leading payment system for goods and services. Retailers such

as supermarket have played a key role in helping the debit card to become a

major payment mechanism. In the UK, retailers also offer the added

"cashback" facility as a customer service which encourages the use of the

debit card offering convenience for a customer to access their monies at the

counter of a retail outlet instead of going to an ATM or bank for this particular

reason44. The benefit of offering customers ‘cash back’ schemes not only

reduce their banking costs, the costs of securely holding high levels of cash

on retail premises or having them transported securely to banks, but also in

reducing their customers direct interactions with their banks, whilst

increasing their interaction with the supermarket as a financial services

provider!

Although credit cards remain the preferred payment method for many

consumers - according to Visa (San Francisco), nearly a third (32 percent) of

merchant payments were made with credit cards in 2005 – industry trends

suggest that debit card usage is growing globally. Visa reports that debit

42 See http://www.meps.com.my/news/media/2006/1109.shtml. National Itmx and Meps sign cross border atm link - september

11, 2006

43 See http://www.maybank2u.com.my

4444 Newman, Andrew and Greenland , Steve. (2005)

25

cards accounted for 15 percent of merchant payments in 2005, up from less

than 10 percent in 2002.45

2.3.3 Telephone based

The telephone based channel only requires the customer to have access to a

telephone in order to access a wide array of simple financial services. It is a

very cost effective method of prospecting new clients and simultaneously

providing different services to customers. Hence it is not surprising that the

First Direct Bank in the UK (under the HSBC group) was initially established

as purely telephone based. Apart from banking, it is not uncommon for the

telephone to be a distribution channel for insurance as well. For example

Direct Line in the UK initially used the telephone as a distribution channel for

motor insurance while Kwik Fit insurance services is believed to be the

largest insurance outbound telephone marketing operation based in the UK46

Telephone based distribution channels encompasses both inbound and

outbound activities. Inbound activities relate to the customer making initial

contact with the financial service provider particularly to make enquiries;

while outbound relates to the call centre making the initial contact with the

customer to offer new or recommended services. The growth of call centre

expenditures highlight the increasing importance of the telephone based

distribution channel. For example, in the United States, call centre

expenditures account for US$364m in 2003 compared to US$167m in 1998,

while in Europe call centre expenditures grew from US$ 550m to US$ 1.2 m

in the same period.47.

Although the practice of outsourcing of call centres is widely accepted, there

are some areas of concern and problems. Recent news headlines in the UK

highlight concerns with security and customer management by call centres

particularly offshore call centres48. For example, Lloyds TSB in the UK was

recently in the news for keeping their customers hanging for 10 minutes at a

time listening to music rather than passing the call to a contact staff, while

45 Britt, Phil (2007)


47 epaynews.com.

48 Delgado, Martin (2007) and Biswas (2005)

26

Abbey bank moved their call centres back to the UK from India due to

customer complaints. Whilst in 2005, there were reports that bank details of

1,000 UK customers held by call centres in India were sold to an undercover

reporter of a British newspaper. These examples highlight security concerns,

technological glitches, problems with long waiting times as well as customer

dissatisfaction when dealing with call centres. On the other hand, from an

employee point of view the call centre is also noted for its stressful work

environment with staff recruitment and retention difficulties. 49 It has even

been termed an ‘advanced form of Taylorism’50 Within this context,

innovations within call centres are being touted to alleviate such problems,

one of them being ‘homeshoring’ and the usage of automated answering

services51, Also in the UK there is some signs that to improve customer

satisfaction, high street banks may allow customers to directly contact banks

instead of call centers. 52

In Malaysia, the largest local bank network, Maybank has just this year

invested MR60m deploying world-class facilities, such as interactive voice

response and CRM software, in a telephone contact centre to be staffed by

300 employees locally. This investment suggests that at local banks in

Malaysia are realizing the importance of this distribution channel. Industry

research also suggests that almost 90% of financial services prefer to

outsource their internal and customer facing processes locally rather than

abroad.53

2.3.4 The Internet as a distribution channel

The Internet’s impact on the financial services industry seems to be three

pronged 54 Firstly it facilitates transparency of prices and product

characteristics, secondly it enables a more precise pricing structure to distinct

groups of customers, and lastly in terms of distribution it may eliminate some

49 Huws U (1999)

50 Knights, D and McCabe, D (1998)

51 Patridge, Chris (2007)

52 Treanor, Jill (2007)

53 See http://www.theedgedaily.com KPMG: Financial Services firms prefer outsourcing locally. April 5 2006.

54 Clemons and Hitt (2000)

27

costs along with the roles of some groups of financial services intermediaries

– disintermediation.

In fact, the success in the UK of internet-only banks such as Smile and

Cahoot and somewhat contradicts the earlier reported contentions about the

importance of a physical network of bank branches As shown in Table 2

below, the global position with respect to online banking usage illustrates the

domination of Western Europe followed by the United States and Japan,

whilst the trend is rising in all regions.

Table 2: Online Banking users according to Region 2000-2004 (millions)

REGION 2000 2001 2002 2003 2004 Western Europe 18.6 28.0 37.8 47.7 57.9 United States 9.9 14.7 17.1 20.4 22.8 Japan 2.5 6.5 11.9 19.6 21.8 Asia Pacific 2.4 4.4 6.8 9.8 13.8 Rest of the World

1.0 1.7 3.1 5.1 6.1

Total 34.4 55.3 76.7 102.6 122.3 (Source: www.epaynews.com taken from International Data Corporation.)

Figure 5 illustrates the dynamic growth rates, current and predicted, of web

sales making inevitable the rising focus on this particular sales channel for

bank products and services. It is estimated that by 2010 the Web will

constitute 17% of sales. Similarly Figure 6, highlights that in 2010, the Web

and the Branch are expected to be nearly equal in their usage as financial

service channels.

Figure 5: Distribution of Sales across Channels

(Source: www.wrbr.06.com)

28

It is increasingly apparent that some financial services are more likely to be

distributed using the Internet as compared to others. In this respect, many of

the traditional retail banking services such as checking of accounts, and

transferring monies, bill payment, ordering of chequebooks and making

enquiries can be conducted easily over the Internet; however, other financial

services such as mortgage and the insurance sector are still heavily regulated

and customer preferences still dictate the requirement of other distribution

channels 55

Figure 6: Distribution of Services across Channels56

(Source: www.wrbr.06.com)

In the UK for instance, the traditional face-to-face channel still accounts for

nearly 70% of the retail insurance sales and nearly the entire pensions

sector57. A similar experience occurs in Malaysia, where insurance distribution

channels are still predominantly the agency force and only recently

bancassurance. The usage of the internet as a distribution channel for

insurance products is still very low; this is partly because of consumer

difficulties in understanding some insurance products such as Life insurance

and a higher requirement for professional advice in commercial insurance.

Other impediments include fee structures between direct and indirect sales

forces and the enforced regulations in the market.

55 Dumm and Hoyt, (2003); Gough, (2005), Clemons and Hitt, (2000) and, Howcroft et al 2002).

56 Services include day to day banking transactions such as cash withdrawals, cash and check deposits, wire transfers, printing

bank statements and ordering checkbooks, providing technical assistance, resolving incidents and complaints and locating

documents.

57 Deloitte (2006)

29

In Malaysia, the largest commercial bank’s Internet service, Maybank2u.com,

currently has over 2.2 million registered users. Among the most popular

services are balance enquiry, bill payment, fund transfer and purchase of

prepaid mobile ‘phone and smart card payments. Maybank2u.com registers

an average of more than 7 million transactions valued at over RM1 billion per

month. A perusal of their website shows the type of services offered which

includes:

• Enquiry services

• Funds transfer

• Foreign telegraphic transfers

• Cheque services

• Fixed deposit

• Utilities payment

• E-standing instructions

• Sms alerts

• Internet only accounts.

• Online cards, stocks and loan applications

The Internet is generally believed to reduce costs in the transaction of

services, whilst adding customer convenience, but in contrast, the additional

convenience may convert into an increased level of transactions that may or

may not materialise into significant cost savings. Therefore, in times of

increasing competition the question of whether costs improve, not

withstanding the internet, is more likely to have a negative influence in terms

of revenue. 58 However, the Internet without a doubt enables customers to

conduct transactions, make purchases or amass information at a click.

Using data derived from Hodes et al (1999) figure 7 highlights the low

marginal cost per transaction in US dollars for a financial institution providing

a standard financial transaction through different delivery channels.

58 Clemons, and Hitt, (2000)

30

Figure 7: The Internet and cost of transactions

(Source: Claessens et al, 2002)

But the impact of the Internet cannot just be measured in direct or possible

cost saving, there is also the increasing awareness of the costs to financial

organisations of poor use of the technology. For example problems of

Internet security have huge potential cost implications for banks and can

overnight change their customers’ behaviour and usage because of a security

breach. In 2005, the purely internet based bank Cahoot in the UK suffered

when users were briefly able to access other people’s accounts, also noted

was the case of HFC bank sending out an email revealing personal details of

customers to other people59. Another ongoing problem is ‘phishing’ where e-

mail messages are sent to customers purportedly from legitimate firms such

as banks, These emails resemble the real firm’s messages , featuring similar

corporate logos and formats60. Although the internet’s commercial use is not

new, these problems can turn away customers. Specifically, financial services

must ensure that customer fears with security issues are effectively allayed

when interacting with them over the internet, apart from being attentive to

other factors such ease of use and perceived usefulness of the sites,

responsiveness of online interactions, and product variety over the internet.

61

59 See http://www.bbc.co.uk Cahoot hit by web security scare. 5 November 2004.

60 See http:// www.computerworld.com/securitytopics/security/story/0,10801,89096,00.html 61 see Suh and Han (2002); White and Nteli (2004), Mckechnie, Winklhofer and Ennew (2006)

31

Additionally, there is the need to maximise the understanding of fit of

products and services to the likely audience of this channel. Research

suggests that customers who use the personal computer as a banking

distribution channel are consistently wealthier, two to six years younger,

more financially stable, have higher product usage and asset balances

compared to traditional customers and importantly have greater propensity

to adopt future bank products62. These findings somewhat parallel the

evidence from a study of PC banking in Denmark that suggests that PC

banking users on average were more satisfied, thus potentially more loyal,

more willing to recommend, less price sensitive, likely to give more

feedback63

2.3.5 Mobile Financial Services

A much newer development in the field of financial service distribution is the

use of mobile phones for the transmission of information on services and

conducting transactions. Mobile phones are an important and relatively

inexpensive mode of communication for many consumers.

The global mobile phone subscriber figures as shown in Table 2 give an

indication to the vast potential of this relatively cheap distribution method.

Table 3: Global Mobile phone subscribers according to Region.2005

(Figures rounded to the closest thousand)

Region Year 2000 (000’) Year 2005 (000’)

Africa 15647 130290

Americas 181951 458794

Asia 240581 849849

Europe 291549 675606

Oceania 10293 22531

(Source: International Telecommunication Union. www.itu.org)

62 Hitt and Frei, (2002)

63 Mols, (1998)

32

In particular the uptake for this new distribution channel is more apparent in

the retail banking sector. Statistics highlight that mobile finance services

represent 24% of the top three priorities of European banks in 200464.

suggest that over six million Western Europeans make banking transactions

by mobile phone and the trend is rising, while according to the IDC 4.6% of

the total Western European population will access financial services and

information including banking, investing and insurance via a mobile

connection by the end of 2007.

The important feature of the mobile phone is that 3G technologies also permit

access to online services using a mobile device. Juxtapositioned to the fact

that in many developing countries a higher proportion of the population

utilises mobile ‘phones for web browsing than fixed computers or laptops65

The potential use of a mobile device for a wide array of financial services is

yet to be fully realised at this point of time. However, the use of text

message banking for making transactions and account maintenance, for

information, and for advertising new products and services is common.66 For

instance, banks are now able to send out text messages on offers, new

products and services, as well information directly related to customer

accounts and transaction activity. First Direct bank of the UK , has

complemented its existing channels with the mobile phone channel; sending

out text messages to customers to allow them to keep in touch with their

current status of their accounts including sending mini statements, and

alerts relating to specific events such as salary cleared. In Korea,

approximately 581,000 Koreans use their cell phones to complete a total of 4

million banking transactions in a month. Also as in the case of Korean banks,

the mobile phone can potentially be a hand held ATM machine, because new

phones have slots for a tiny memory chips with their banking data and

encryption code for secure transactions.67 In Malaysia the first bank to

introduce mobile banking was Maybank in cooperation with the nation’s

64 Celent communications June 2004

65 Zhe-Wei C Quiang & Pitt, Alexander, 2004

66 Riivari, 2005

67 Moon Ihlwan (2004)

33

largest cellular provider CELCOM. The service is offered to Maybank

customers who subscribe to Celcom’s GPRS/3G services. This means that

only those who have 3G enabled phones are able to access this service

automatically. The services currently being offered are the same as their

Internet facility on Maybank2u.com.my.

However, like all other technologically driven channels, and in particular the

internet, security issues are still important considerations for customers to

adopt this channel.

As mentioned earlier, technologically driven channels is fast becoming

necessary in financial services distribution. Financial service providers may

choose to complement their current physical channels or interact almost

virtually with their customers. Since the use of technologically driven

channels is inherently in the domain of self service, customers are involved in

the service distribution process; hence there is added risk, anxiety and stress

as well as cost in using these technologies. In view of these issues, financial

service providers have to consider the security of such channels,

Nevertheless, the time poor customers with access to such technologies

appreciate the benefits of convenience and speed these technologies provide.

2.4: Non-Financial Services Retailers

A direct channel of distribution, but a non-traditional one, is the non-financial

organisations foray into financial services. Examples of typical non financial

service retailers are illustrated in the following table;

34

Retail Outlet Typical Financial Services Distributed

Supermarkets Current banking accounts, general insurance:

motor health, holiday, unsecured loans, credit

cards

Motor dealers Car loans, creditor protection insurance

Home improvement Companies Finance, creditor protection insurance

Electrical goods retailers Hire purchase, extended warranties, creditor

protection insurance

Department stores and clothes

retailing chains

Own-label credit cards

Furniture outlets Hire purchase, creditor protection insurance

(source: Ennew and Waite, 2006)

As illustrated above the entry of non financial organisations into financial

services can be in many forms but two more popular ones is the more

extensive entry of retailers into financial services particularly in the UK, and

the less extensive issuance of credit cards by retailers. Both these forms will

be examined in the following paragraphs.

In the UK a number of traditional retailers effectively serve as distribution

channels for financial services offering products from traditional financial

services organisations but under their own brand. Thus for example, Marks

and Spencer in the UK offers a range of financial services including credit

cards, unit trusts, investments and savings accounts, insurance both travel

and personal; for weddings, pets as well as travel related financial services.68

They have sold their financial services to HSBC, but still trade under Marks

and Spencer original brand.. Similarly, leading food retailers Tesco and

Sainsbury both offer an extensive range of financial services to their

customers (Quilter, 2005), building on the strength of their brand name to

attract and retain customers.

68 See http://www6.marksandspencer.com . Website for financial services offered.

35

Retailers in particular are more attracted to the proposition of offering

financial services because cost savings in accepting and processing

payments; and potentially large profits from the core brand extension.

Research suggests that there are three strategies that retailers have used;

firstly is to manufacture financial services themselves as Marks and Spencers

may had done initially, secondly is to offer products branded by one or more

financial service providers, lastly, the retailer may use a financial services

firm to provide the ‘product’ but sell it under the retailer’s own brand name

as Tesco’s and Sainsbury do in the UK by providing financial products by

Royal Bank of Scotland and Halifax Bank of Scotland respectively under their

own brand name 69,

Throughout history retailers have extended credit facilities to customers to

retain customer loyalty albeit in a much smaller scale70. Financial services

represent a very profitable brand extension , with the added benefit of

building closer relationships with customers and enhancing customer

retention simultaneously strengthening the brand even further though there

is the risk that the poor delivery of such products could instead harm the core

brand71 For the financial services providers, the retailers provide significant

volumes of customers , extending their product reach and penetration rates

and at the same time extending the financial service firm’s brand if their own

brand is used72. It is a win-win situation for the retailers, the financial service

firm and the customers involved.

One report suggests that UK retailers are still small players in the retail

banking services market as none offer current accounts, only one offers

home mortgages, and the retailer banks only have retail deposits of

approximately ₤2 billion in comparison with the total market of ₤550 billion,

with a focus on unsecured personal lending representing not more than 5%

of the market share, although the three retailer banks are very active in

personal loans.73

69 Colgate and Alexander (2002) 70 Alexander and Colgate (2005)

71 Alexander and Colgate (2005) (2000) and Colgate (1998)

72 Croft, Andrew ( ) Getting Paid. Credit Control

73 Worthington , Steve and Welch , Peter (2006)

36

The non financial organisations distribution of financial services is probably

more common in the case of credit cards as it relatively more straightforward

than offering a range of products and services. The volume of co-branded

credit cards is rising. In the UK, Marks and Spencers, Tesco and Sainsbury

offer their own credit cards to their customers while in the US, Disney has its

own Visa card ,while Delta airlines has a credit card supported by American

Express. Globally, Shell offers credit cards in liaison with Citibank and Visa

amongst others, in Canada, the US, Philippines, Denmark, Hong Kong, US

and the UK74. Even the car manufacturer BMW , together with American

Express, are recently offering co-branded BMW and Mini credit cards in the

UK, US, Spain, Austria, Thailand, Australia, New Zealand and Japan 75. Co

branding with regards to credit cards represents a form of brand extension of

the non financial firm and appeals to the loyal customer.

A typical retailer issued credit card are "co-branded" with either Visa or

Master Card , normally without an annual fee , with which credit card holders

are automatically eligible for special discounts, and special privileges from the

retailer for other products, information and any other privilege such as for

reservations and rewards.76 These cards may be used in the retailer outlet

but also maybe used at other accepting retail outlet. For the retailer, the co-

branded card increases visibility, attracts customers and potentially fosters

higher loyalty while for the financial service provider the co-branded card

multiplies usage particularly as the credit card typically presents additional

benefits for the card holder.

The choice for a retailer to either offer financial products or conservatively

issue co-branded credit cards depends on the retailer’s capacity and strategic

suitability to such an effort, additionally the association with retailers also

hinges on the financial service firm’s ability to offer and manage products

suitable to this particular segment of retailer customers.

74 From websites of Marks and Spencers , Tesco , Sainsbury , Disney, Delta Airlines and Shell. 75 See Financial Times (2006)

76 Worthington, Steve (1994)

37

In Malaysia, Aviva has tied up with appliances retailer HSL Electrical &

Electronics Sdn Bhd, to distribute its Home Replacement Scheme which offers

coverage for household electrical appliances damaged or lost by way of fire,

lightning, burglary or other stipulated causes.77 This example illustrates that

insurance products can also be distributed by non financial institutions as

supermarkets are doing with bank products and credit cards.

The entry of non-financial institutions into traditionally specialist financial

services is more popular in developed, financially sophisticated countries. In

Malaysia, supermarkets such as Tesco, and Carrefour have yet to enter the

financial services market, as there are stringent governmental regulatory and

customer impediments in place. But co-branding efforts are very active with

retailers of all sorts; supermarkets, furniture outlets and electrical appliances

outlets having special discounts for users of particular debit, credit or ATM

cards. For example most major retail banks in Malaysia have special zero

interest deals with large electrical or furniture retailers. Of recent the non

financial organisations have intensified their presence in the Malaysian

financial services market place. Aeon Credit services, Tune Money Sdn.Bhd

and the upcoming BMW financial group.78 This is a sign that the trends of

supermarket banking and foray of non financial organisation in financial

services is slowly but surely occurring in the Malaysian market.

Another channel but less publicised is the quasi financial service outlets.

These outlets are not traditional financial services providers but have been

channels for payments and providing access to products such as savings and

bonds particularly in relation to government issued or guaranteed savings

and bonds. In this context the most popular quasi financial service outlet is

the post office. In Japan , the impending privatisation of the postal system is

opening up opportunities for it to extend its range of services into mortgages,

credit cards and small business loans79. Other examples of financial services

distributed through post offices include Benelux bancassurer Fortis, working

with the state-owned Belgian post office Belgium Post on its joint venture La

77 http://www.btimes.com.my/Weekly/PropertyTimes/News/News/20041102154049/Article/ 78 Tam, Susan (2007)

79 Nakamoto, Michiyo, (2007.)

38

Banque de La Poste, and recent agreement with An Post, the post office in

Ireland, to create another financial services joint venture expected to

materialize later this year80 In Netherlands, Germany, UK, and Ireland the

post office offers a formidable network of branches for financial products.81

3. Product Channel Interactions and matching customers to distribution channels

With such a wide array of distribution channels available to the financial

services provider, it becomes imperative that customers are moved into using

the appropriate channels. This means for the provider that customers utilise

low cost channels for the appropriate transactions. The early years of the

rise of the Internet, self-service kiosks and telephone channels resulted in the

anticipation that traditional direct channels of distribution would die a natural

death. Instead the opposite was more the case, trends indicate that instead

of reducing transactions, consumers began to use the different distribution

channels for more and different types of transactions based on complexity

and other requirements such as advice and reassurance. This highlights the

reality that customers will not automatically adopt or utilise a channel as

expected. Research highlights that from a consumer perspective selection of

a distribution channel is based on the dynamics of customer – product

interaction, customer –channel interactions, customer – organisation

interaction, apart from consumer characteristics from a socio-economic and

psychological point of view. Additionally, there is significant importance of the

product channel interaction. Specifically, there is a natural tendency for

simple, low involvement products to be well suited to technology-based

channels, while complex products, for instance investment and wealth

management products were more suited to face to face channels. The

element of suitability in essence depended on the level of risk and price of

the product considered.82 With this in mind, financial services providers as a

norm use the traditional carrot and stick approach to entice customers into

80 European Banker (2006) (1)

81 European Banker 2006 (2)

82 Black, Lockett, Ennew, Winklhofer and Mckechnie (2002)

39

using the appropriate distribution channels. On one hand, incentives and on

the other fees are imposed.

In Malaysia, Maybank has recently announced the imposition of fees on a

variety of over the counter transactions, which are available through ATM’s,

to encourage customer usage of ATM machines. Meanwhile Public Bank offers

a 1% discount on all bills paid online to encourage usage of the Internet bill

paying facility. In the UK the imposition of fees has provided some examples

of conflict with current consumers or regulatory laws. Perhaps because of

this considerable industry funded research has focussed on current and future

consumer education (see for example Knights and whoever it was, Christine,

for I think the FSRF), whilst specific marketing expenditure has been directed

at promotions and communication to encourage movement to appropriate

channels of distribution. In the United States, research has highlighted that

customer /provider communications in a variety of formats may resolve this

issue. The idea is that consumers will move to the appropriate channels if

they are better able to understand the benefits of such a move and are

comfortable in its use. Inevitably, the introduction and utilisation of new

distribution channels will add to the burden of providers in their quest to

providing seamless service and proper utilisation of consumer information

when dealing with customers through different channels.

4. Conclusions

This report begins with the objective of presenting an overview of the key

trends in distribution, providing a comparison of trends in more sophisticated

financial markets particularly the UK and the US, to Malaysia. Within the

context of blurring lines between providers, a simple way of understanding

distribution channels is to review them in categories of traditional direct,

indirect, and technology driven channels. Additionally new distribution

channels include the non financial organisation’s foray into financial services.

The examination of distribution channels reveals significant trends that are

highlighted below:

40

1. There is a revival of the branch network entailing the opening of more

branches, in mini form or by sharing of branch facilities

2. The adoption of retail concepts in the design, layout and environment

of the branch.

3. The increasing importance placed on the training, recruitment of

financial services personnel for cross selling purposes

4. The rise of banassurance as a model for selling investment, insurance

and wealth management products

5. Innovations and extensions of technology driven channels adding more

functions and more types of these channels for example the

enhancement of call centres into customer contact centres and use of

mobile phones to enhance accessibility to financial and other payment

or transfer services

6. And lastly the foray of non financial organisations into financial

services such as supermarket banking, and credit card issuance by

retailers. Additionally the use of quasi financial services providers such

as post offices to further extend financial service firm’s reach,

The trends set out in brief above highlight that traditional channels such as

the branch network are showing a revival in importance. However, the reality

that high value customers are using low cost channels, whilst low value

customers are using high cost products is evident and the question arises of

how to steer the right customers into appropriate channels. In the US and

UK, other direct and indirect forms of distribution continue to exist alongside

technologically enabled channels, albeit in modified versions. Where some

financial products, are more complex, reassurance factors play a large role in

distribution channels acceptance by customers. This includes mortgage and

insurance products, which necessitate the use of intermediaries although

more standardised options can be made available through technology-

enabled channels. Importantly, the product influences the type of channel

that is selected by customers because complex products naturally require

face to face consultation whilst simple products can be distributed by

technology driven channels signalling the dynamics of product- channel

interaction. From the consumer perspective selection of a distribution

channel is also based on the customer – product interaction, customer –

41

channel interactions, customer – organisation interaction, with the added

complexity of consumer characteristics viewed from a socio-economic and

psychological perspective. Herding customers into appropriate channels can

be achieved by a carrot and stick approach, but communication has an

additional very important role to play.83

A final remark is that governmental and sector regulation of distribution often

constrains the type of distribution channel available in any particular

geographic region, similarly it can impinge on the type of inducement that

can be used to convert consumers to a preferred channel. Nevertheless the

developments in distribution of financial services are fast and furious in light

of regulatory and societal demands as well as industry competitive demands.

83 Myers, Pickersgill and Van Metre (2004)

42

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